In a series of lectures at George Washington University, Federal Reserve Chairman Ben Bernanke attacked the gold standard again. It’s rather ironic that he made his attack at a University named after George Washington who was present at the drafting of the United States Constitution and was unanimously elected president of the Convention.
The Constitution includes the following about gold and silver:
“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
Paper money was issued as “gold” and “silver” certificates that could be redeemed for physical gold and silver. These were later replaced with “Federal Reserve Notes.” There is nothing backing these pieces of paper (actually, currency “paper” is composed of 25 percent linen and 75 percent cotton) other than the confidence that people have that other people view the money as valuable. Once that confidence goes, people start hoarding things of value – gold and silver being the most popular. Loss of confidence in un-backed paper money has a long history. Consider this:
The U.S. Department of the Treasury first issued paper U.S. currency in 1862 to make up for the shortage of coins and to finance the Civil War. There was a shortage of coins because people had started hoarding them; the uncertainty caused by the war had made the value of items fluctuate drastically. Because coins were made of gold and silver their value didn’t change much, so people wanted to hang onto them rather than buy items that might lose their value.
In his lectures, Bernanke tried to argue that “the gold standard did not work well.” Of course it didn’t if you were a politician who was using worthless paper dollars to give the impression of economic prosperity.
In a slide presentation, Bernanke outlined what he contends is gold’s greatest weakness. You might have to read this at least three times because you’ll think you’ve read it wrong:
The strength of a gold standard is its greatest weakness too: Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.
That’s the point, Mr. Bernanke. The gold standard is designed to keep politicians from turning our money into worthless scraps like the discarded leftovers of cotton and linen our money is made from.